Why Americans Are Broke, And Getting Further In Debt

Just as the president reminded us yesterday we are not a deadbeat nation, merely borrowing money today to pay the bills of yesterday, so, as the NY Times reports in this all-too-real article, many of the citizens of the US are also living not just paycheck-to-paycheck but short-term-loan-to-short-term-loan. As one debt-consolidation service noted "They've been borrowing just to meet payments on previous loans; it builds on itself." Rings an awfully loud bell eh? (and yes, we know the government's finances are not run like a households - though at some point the check book needs to balance). People in tough 'economic' situations fall into the 'poverty trap', borrowing money at ever higher interest rates in a shell game to keep previous borrowers at bay. The average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010 - as people dig deeper, precisely because they long to escape. As the focus of the article notes, "the belt-tightening was the easy part... the larger problem was cash-flow." Critically, experiments show that 'economic' scarcity by itself - independent of personality or any other factors - fuels a drive to borrow recklessly.

The belt-tightening was the easy part. Cancel the cable. Skip the air conditioners. Ration the cellphone, unplug the wireless Internet, cook rice and beans — done, and done. The larger problem for LaKeisha Tuggle, 33, who had lost her public relations job, was cash flow: After her unemployment insurance and savings ran dry, there was none.

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The usual explanations for reckless borrowing focus on people’s character, or social norms that promote free spending and instant gratification. But recent research has shown that scarcity by itself is enough to cause this kind of financial self-sabotage.

“When we put people in situations of scarcity in experiments, they get into poverty traps,” said Eldar Shafir, a professor of psychology and public affairs at Princeton. “They borrow at high interest rates that hurt them, in ways they knew to avoid when there was less scarcity.”

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People dig deeper precisely because they long to escape.

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She recently made an appointment at GreenPath, a national debt-consolidation service, to see whether she could begin to pay down what she has borrowed. “By the time people come to see us, they have no more credit to use,” said Kathryn Moore, a counselor at GreenPath. “They’ve been borrowing just to meet payments on previous loans; it builds on itself.”

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In one experiment, participants competed in rounds of the game “Family Feud,” a trivia contest in which each question allows for multiple guesses. One team was “poor,” allotted only 15 seconds per round; another was “rich,” having budgets of nearly a minute per round. Both groups could borrow time against future rounds, but the poor borrowed far more, progressively shrinking their future paychecks while the rich mostly avoided debt.

The research team, which included Sendhil Mullainathan and Dr. Shafir of Princeton, demonstrated that same effect in a series of related experiments. Scarcity by itself — independent of personality or any other factors — fuels a drive to borrow recklessly.

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She picked up her purse on a chilly afternoon that winter, drove to a local strip mall and walked into a storefront payday loan office. “As long as you have that bank account, and a check with you, you can qualify,” she said. “So I took a check in, and when I walked out I felt bad. But I looked at the payments and thought, ‘Oh sure, I can do that.’ ”

And she could, just not for very long.

Payday loan operations typically charge 15 to 30 percent interest every two weeks, and many who have used them report slipping behind quickly and being forced to pay off the loan — with yet another loan, often from another payday operation. By the time people are in this deep, they have usually crossed a line and begun to think of borrowing as a necessity rather than a convenience or quick fix, experts said.

why arent all these gun nuts and "patriots" serving their nation in the military? Because they are buch of pussies who only want to play war but dont want actually go to war.

So you're going to make a rant about placating the military and the detrimental effect it has on the middle class and its citizenry in general... and then wonder not only why the middle class possesses firearms, but also why the middle class and citizenry don't join the military? Am I missing something here?

why arent all these gun nuts and "patriots" serving their nation in the military?

Because (if by nation you mean government), their government has by every measure failed them, miserably, and is now blaming them and confiscating their wealth through ZIRP, for the decay in morality by coming after their guns (coming after their 2nd) the only substantive rights they have left, which, IMO demonstrates absolute failure of the State. So, typical of government to blame everybody else for the problems they themselves created. The patriot does not give a shit about whats going on 9000 miles away. The patriot cares only about his freedom, his family's freedom, and the liberty to povide for themselves and defend themselves from psychopathic control freaks that threaten their personal and economic liberties.

Of course the retarded masses that infest ZH don't get it. They contradict themselves because they are STUPID.

Oh ya - patriots who will defend the cocksucking elite in one breath - then in the next they're bragging about their guns and how they will fight the government to their last breath.

They say the elites are controlling the masses - then when faced with global warming evidence they say that's all bullshit - in spite of the fact that one of the richest families in the US (Koch brothers with huge oil interests) are FUNDING the CLIMATE DENIAL lies.

That's the thing about many of the people on this site - they are STUPID and they are actually the MORONS who enabled what is to come

Our upscale mall was empty yesterday and five stores were boarded up. The handful people wandering around were either geriatric folks getting exercise by walking the perimeter (partially b/c streets are getting unsafe) or a couple of lonely people looking in the windows.

'Thingamajigs' in the stores were reduced 70-80% and yet there were no buyers.

It is really simple math. Every time new money is borrowed into circulation and includes interest, the amount of net money in the economy goes down. Thus we fight for pieces of a smaller and smaller pie as time goes on. More people + smaller pie = trouble.

It is really simple math. Every time new money is borrowed into circulation and includes interest, the amount of net money in the economy goes down. Thus we fight for pieces of a smaller and smaller pie as time goes on. More people + smaller pie = trouble.

the research is pointless if you believe that poverty does not equal behavioral stupidity.

i believe it has more than a sliver of truth, what we are missing is the mechanism for migrating from stupidity to smartness and, ergo, from poverty to riches.

can blame gaming, networking, drugs, credit or whatever for that. i know plenty of dumb people who have done smart things and done well, plus many smart peope who have done dumb things and done poorly.

now if we can just redefine what a smart thing is (morals, ethics, manners, drug avoidance????) maybe we can all just move forward

Hey, tax refunds are coming up in a month or so these folks can play catch up again for a couple of months until they blow their wad on a fancy dinner with expensive cocktails, buy that Gucci purse she's got to have, replace Junior's Abercrombie wardrobe, all the while making minimum payments on their exacerbating and excruciatingly high interest loan balances rather than saying NO to more debt and paying it off, saying NO to wifey and her fancy wares, saying NO to Junior and his siblings' excessive wardrobes, saying NO to recklessly throwing cash at expensive restaurant meals, saying NO to ridiculous iphones and their abhorrent costly plans. Don't these people know who's paying for all these splurges??? Surely all that refund isn't their own tax withholding.......GRRRRR!!!!!

While I agree, this is all chump change compared to the past and still astronomically high prices of the aging shit boxes across America. People were signing up left and right to pay a huge mortgage for the next 30 years and taxes and maintenance forever.

I could never understand how people could complain about a $50 shirt, yet rush out and buy a 2400 square foot ranch that hadn't been updated since the 1970s for $500,000. Maybe it was the promises from their mathematically challenged realtards that they would be gazillionaires as their house prices skyrocketed in the next couple of years.

Well we are back to the topic of the "Attack of the Killer Algorithms" that has shifted the money to those who can afford those algorithms wiht buying the talent to write them. We are in such bad shape that way and government sits in denial and I have written the FTC and a few others on this topic. It's like living in fairy tale land to not address this and get some folks in office with computer science experience that will do a reality check. Looks like what we have left in the cabinet that are staying on for another 4 years are the least effective too, I have watched it with HHS, sad and they say dumb things as they don't have the working mechanic knowledge of how all this works. Even Ticketmaster blew it on ticket sales for the inauguration and they have the same sentements as the BATS exchange...well folks it's part of business and you just have to live with it as we are not fixing it any time soon...they are one of the latest links on my Attack Series.

Read this, Plos One medical journal study complete with MRI images and more..."the fear of math gives people physical pain", let's start stuffing members of Congress in MRIs and watch those brain waves and see if they are afflicted:)

Definitely it has been the use of math and algorithms that has put a lesser educated working class where we are today. Pay attention to the first link in the Attack series where I said in October of 2011 that the Occupy movement was all about the Attack of the Killer Algorithms in not understanding what has happened. Recently to m delight someone else whos' even smarter than me and I don't even know her said the same thing and she used to be a quant for a Hedge fund and is geting a lot of attention these day, which is good and she, like me felt a need to reach out and explain to the protesters as to why there were there as most had no clue but knew something was wrong. Cathy backs this up and said that knowlege was enough. She was frustrated in her work with futures in assessing risk, they had her do the work and then didn't pay attention to the risk assessments she gave them on futures...so why do they do them if they only get ignored one might ask? Is this another store front to show compliance with assessing risk while not using it? Strange...but when making a buck comes along we know what happens.

On this same note, PBS Frontline has a new investigative report coming out on the 22nd of January, "The Untouchables"...name fits:) Too big to jail and this of course is one more about fraud on Wall Street and I have it on my schedule to watch. Here's the llink to the trailer.

It's all been math and formulas and I keep 5 videos on my blog shown on every page in the left hand side to include the documentary "Quants, the Alchemists of Wall Street" that tells it al as far as fantasy math and code.

Also see how big firms are running these code for cash contrests. It's not a stand alone contest as they work it through accelerators and start up incubators, a way to to get code cheaply without offering any jobs too...health insurance companies are good at this and sure there's a place for some of this but not big corporations are doing it like a busienss model, get those to earn notariety from us, the big companies here and they will do it for almost nothing..in the meantime the consumer makes not enough to pay rent and more...this is a joke as well. Looks who's in it, GE, Verizon and more. If you happned to watch the 60 minutes section on robots taking over jobs a very important comment was made there about the number of employees that Google, Apple and others have on board in the fact that it doesn't take as many employees to run them any more..just keep rolling out cash for code and everyone works on the cheap.

I think the experiment designed around the "Family Feud" game is wonderfully inventive, genius even. My hat is off to the research team.

Our society has outlawed and heavily enforces most forms of predatory behavior toward its citizens. However, predatory lending persists because the victims are blamed, are said to be irresponsible, but here we see that the victims are struggling to be responsible in a hopeless catch-22 system.

A large contributing factor to this paycheck-to-paycheck living is many people bought homes with price tags way above what their salary could afford, with, of course, the smiles and nods of approval from their Realwhores and mortgage brokers. Now those people are feeding huge mortgages and tax bills with little left over for discretionary spending. They are still trying to lure the sheep in to the housing ponzi with the still suffocating prices. I drove around my suburb just this morning and a house (2400 sq ft) that went to forclosure, was back on the market after some parasitical flipper purchased and rehabbed it. Asking price now - $515k, asking price when the greatest fool bought it in May 2005 - $535k.

Telling. And resale has taken a bit of a schwack here in Canada as new home builders caught on very quickly in '08 that they had to drop their prices on new home construction or go out of business. So resale has kind of pulled back some (I think its going to pull back more actually, especially if price deflation for commodities occurs). However, I would only qualify this observation that it still really depends where you are in Canada/city/neighborhood/etc. Things are, on average, still pretty frothy IMO.

i hate to say it...but in answer to "we are not a deadbeat nation" i am reminded of the saying...if it looks like a duck, walks like a duck and quacks like a duck, the chances are it is not the king of the jungle

I think "trav777"said it best one time if I am quoting him correctly. "They pull it out of their ass and you have to pay it back with production".

Except how does a struggling family pay it back with production when nothing is produced but rather consumed?

Going back to school (which is useless anyway for most), declaring bankruptcy (you can't), or having a salary that keeps pace with the cost of living is simply not possible.

The government allows these pay day loan places to exist to potentially ward off the "black market for cash", however as everyone here seems to get, It simply creates another "trapped", feedback cycle. Your dammed if you do and your dammed if you don't.

Forgive the elite banksters but keep the middle class and poor trapped and enslaved to them?

Marxism maximized. Most of the socialist states are broke. A few still American states like North Dakota and Texas are booming, mostly. Government destroying the ability of Americans to become prosperous with far too many rules and regs. However, government employees making out like bandits as The Dictator hires more and more and pays them more and more all in the name of favoritism and kick-backs. We are transferring a once productive society into a statist run non-productive, money wasting collective. You could cut the government in half and few would notice except for the millions of suddenly non-employed gold diggers and the welfare state lost without their nanny.

Wanna know the reason? It's because there is no such thing as "wealth creation", it's a flawed and stupid concept. Wealth is not created, it's stolen, and it's stolen from the easiest target. That would be you.